We see significant potential for real estate investment trusts across the Asia Pacific. Listings have already grown strongly over this decade, with the total number of listed REITs in the region growing from 50 to 792 and the market capitalisation of the S&P Asia Pacific Ex-Japan index growing by 71 per cent.
These growth rates are made more impressive knowing that some countries currently don’t have any REITs or that listed REITs remain small.
Whilst REITs have been largely a developed-market phenomenon so far, incremental growth is likely to come from the emerging markets, and exciting potential new listings in markets such as the Philippines and India.
Opportunities emerging in the Philippines
Where REIT legislation does exist, we can see quite different rules around a number of areas including gearing levels, tax and the amount of development allowed. The Philippines is a market with attractive fundamentals and while there has been REIT legislation in place since 2009, there have been no REIT listings to date.
The reasons are two-fold. Historically, rules around minimum public ownership levels (67 per cent) were deemed too onerous by developers; and tax (VAT) on asset transfers into the REIT vehicle (12 per cent) was considered too high.
The government is now motivated to develop the REIT market. Taxes on VAT transfers were recently reduced to zero, and the local Securities Exchange Commission has suggested it may be planning on lowering the minimum public ownership requirement to 33 per cent, should proceeds from REIT listings be invested onshore.
these issues are resolved, which will most likely be during this year, we could
very well see new REIT listings.
We are excited by the prospect, given the Philippines has some of the fastest population growth rates in Asia combined with attractive property assets held by the major developers, including Ayala Land and SM Prime.
India well placed to list first-ever REIT
may beat the Philippines to its first-ever REIT listing with all its REIT
regulations now in place. An office REIT, Embassy Parks Office REIT, backed by Blackstoneand Embassy Group, will be listing
imminently, creating the largest listed (by floor space) office REIT in Asia.
Indian office demand is impressive relative to other global markets, underpinned by a strong domestic economy combined with significant growth in its IT and outsourcing sectors.
Our Asia Pacific Real Income strategy is currently getting exposure to the buoyant Indian office market via Ascendas India Trust, a Singapore-listed Indian office REIT with quality assets across key IT sub-markets such as Bangalore.
listings could reasonably be expected given the country size, especially if
India follows in the footsteps of other markets like Singapore.
Singapore and Australia lead the way
It is interesting to note what has happened in other Asia Pacific REIT markets as an indicator of the potential for emerging countries. Singapore, which launched its first REIT in 2002, now has 31 listings. This is incredible growth for a country without a large land base.
Australia, is another good example. Australia saw the REIT concept first introduced in the 1970s and since then has seen notable growth in the number of listings, with the market now one of the largest REIT markets outside the United States.
Hong Kong success story
have also been some notable success stories from REITs in Hong Kong. One of
those would no doubt be Link REIT,
a current key holding of our strategy.
Link REIT was spun out of the Hong Kong Housing Authority in 2005 as a vehicle to house a number of its suburban shopping mall and car parking assets. In many cases, the assets had great potential, given their location (on top of rail infrastructure), non-discretionary tenant mix (that is, stable demand) and high levels of shopper traffic from Hong Kong’s dense population. However, many of these assets, under the ownership of the government, had seen little investment and were notably under-rented (rents low relative to the sales per square metre).
From investing further in asset enhancement and improving the tenant mix, Link REIT was able to notably increase rents, improve customer experience and ultimately grow to become the largest REIT in Asia.
Attractive examples already in Malaysia
Malaysia is an example of an emerging market which has embraced REITs. While many of the existing listings are still small, we now have several REITs across the office and retail sectors, with attractive assets in each. An example is Pavilion REIT, which owns the Pavilion KL Mall in downtown Kuala Lumpur and is currently held in our Asia Pacific Real Income Strategy. This asset is one of the most productive malls in Malaysia in terms of sales per square foot and has had consistently high occupancy over time.
remain an attractive asset class with low volatility, above-market dividend
yields and provide exposure to high-quality property assets with steady growth.
We remain positive on the outlook for REITs in Asia given the long-term population and urbanisation-led growth trends across the region.
Additionally, we see significant potential for further REIT listings, especially given the progress being made in markets such as the Philippines and India. These listings will ultimately serve to expand the investible universe for investors, providing access to attractive properties across the region and will ultimately help to develop the capital markets of their respective countries.
Daniel Fitzgerald, Portfolio Manager – Asia Pacific Real Income, Martin Currie, a Legg Mason Affiliate.